A.We have already thought about simple principal-agent problems, where
there is one principal (a shareholder or voter) who tries to set up good
incentives for a single agent (a manager or politician).

B.In many contexts, the problem is more complicated because there are multiple
agents and overlapping principals.In other words, a lot of different principals with potentially
conflicting interests are holding the same agent responsible, and multiple
agents share credit or blame when something goes right or wrong.

C.The most natural intuition is probably that agents' performance falls
because it is hard for principals to decide who to blame.And if there are a lot of blameless agents,
imposing probability multipliers on punishment may be a bad idea too.

D.But there are a variety of contrary intuitions:

1.Avoiding concentration of power

2.Increasing stability

3.Efficiency of specialization

E.Many political systems, including that of the U.S., appear to act on
one or more of these contrary intuitions by setting up a division of powers.

B.But as mentioned previously, in the U.S. and many other systems,
political outcomes are a compromise between several different
"winners."How do these
compromises work?

C.One popular answer appeals to the notion of the "minimum winning
coalition."(MWC)A minimum winning coalition is the smallest
group large enough to impose its decision.

D.Intuition: Why include more people in your winning coalition than you
need?That means dividing up the same
pie between more people.

III.Bicameralism and MWCs

A.To simplify the analysis, imagine that you need a simple majority of
two legislative houses to pass a bill (nothing more).The MWC is 50%+1 of the lower house and
50%+1 of the upper house.

B.So what happens?Following
Cooter, imagine putting median lower and upper ($L, $U) house preferences for
spending on a line, and assume that $L<$U.Similarly, put $L0 and $U0 to indicate the
spending levels that leave the median lower and upper house legislators
indifferent to spending $0.

C.Cooter labels the region between $L and $U as the Pareto set.Movement within this set makes one bargainer
better off and the other worse off.Moving from outside the Pareto set to inside, in contrast,
makes all bargainers better off.

D.Similarly, he labels the region between $L and $L0 as the bargain
set.This is the part of the Pareto
set thatboth sides prefer to
$0.

E.Given the political rules, we know that policy must lie in the bargain
set.Theory can't narrow it down
further, but it's a pretty good start.

F.What does moving from one to two houses do?It (weakly) tends to reduce the total level
of spending because spending will never rise above the lower of $L0
and $U0.

G.But this is not the only effect.It could conceivably increase spending by bargaining the lower house to
accept something between $L and $L0.With only the lower house, you would get $L exactly.

H.These effects are likely to matter more if the lower and upper houses
represent constituencies with very different preferences.

I.Why might this be so?Cooter
points out that since House members are elected by districts, it is
mathematically conceivable that 25% of the population controls a majority of
House seats.(Just "pack"
supporters of your opponents into as few districts as possible!)To do the same for the Senate, you would have
to pack states rather than districts.

1.This is the intuition behind "gerrymandering."

IV.Presidential Veto the MWCs

A.First imagine a situation with one legislative house and a president
with absolute veto power.($E<$L)
What happens?

1.It looks just like the previous situation.

B.Next, imagine adding a president with absolute veto power to a system
with two houses.

C.Adding the president (with $E and $E0) tends to expand
the Pareto set but shrink the bargain set.

D.Last, imagine a situation with one house and a President with a 2/3
over-rideable veto.This tends to expand
the bargain set, because the President is no longer absolutely necessary for
legislation to go through.

E.Just add the preferences of the 33rd percentile of the
legislature to the diagram.If these are
closer to the median legislator than the President, they can strike a bargain
without him.

V.The Role of the Judiciary

A.People frequently think of the judiciary as mechanically
"interpreting" laws.But
judges' political views frequently seem to affect their decisions.

B.But judges' "interpretations" can be overruled by further
legislation.So can judges really affect
legislative outcomes?

C.Yes, as long as they keep their ruling within the Pareto set.

D.Imagine, for example, that two houses of Congress finally agree to
spend $X dollars, which lies somewhere between $L and $U.But a dispute arises and a court gets to rule
on the "true meaning" of the bill.

E.Even if the judiciary ruled for $U exactly, the lower house would be
unable to get the upper house to pass another bill "clarifying" the
meaning of the first bill.

F.Example: Both Houses of Congress and the President sign an
anti-discrimination bill that bans any consideration of race.Could the Court reinterpret this measure to
allow discrimination against whites?Yes, as long as ONE of the three governing bodies actually prefers the
court's version.

VI.The Logic of Divided Government

A.Overall, then, division of powers tends to raise the transactions costs
of passing legislation; it leads to so-called gridlock.

B.If the main principal-agent problem is that agents pass too much
legislation, this makes sense.

C.But division of powers arguably reduces the quality of the
legislation that does pass, because it is harder to assign credit or
blame.If the deficit skyrockets, who
should you vote out?

D.Also interesting: With divided government, one party rarely controls
everything.Voters could reduce
"gridlock" by voting for unified government, but they often do the
opposite!"Ticket-splitting"
is fairly common.

1.Note further: President's party normally loses seats in subsequent
elections.Once a President is in
office, voters appear to deliberately make gridlock stronger!

E.As usual, the way to get around gridlock is log-rolling.The various branches of government can strike
bargains with each other, either within bills or across bills.

VII.Special Interests and the Median Voter Model

A.The Median Voter Model makes no room for "special interests."Voters get what they want.

C.Definition: A special interest is any organized group with preferences
different from the median voter's.The
goal of a special interest group is to pull policy in their preferred
direction.

D.The distinction between mean and median preferences suggests the
possibility that this is actually efficient, though few observers see it that
way.

E.If interest groups disagree, moreover, they may directly cancel each
other out.

F.Similarly, if there is only "so much money to go around," in
the budget interest groups may indirectly cancel each other out.More money for schools means less for the
environment, or defense, or something else.

G.Leaving all this aside, how exactly could special interests exert
influence anyway?Doesn't political
competition prevent it?

A.The most popular answer is campaign contributions.Special interests move policy away from voter
preferences by making donations to politicians.

B.Cash donations are everyone's favorite example, but in-kind
contributions of labor, printing, and so on are also important.(Labor unions do a lot of the latter).

C.Politicians then use these donations to "buy votes."Political advertising is the standard example
here.

D.Why would political advertising work?The usual answer appeals to voters' rational ignorance.The ads are aimed at uninformed voters who
are easy to sway.

E.While this story sounds good, does it really make sense?Why do uninformed voters pay any attention to
ads, if they are typically funded by subversive special interests?

F.Compare this to buying a used car.Just because the buyer is ignorant, does he have to idiotically believe
every word the seller tells him?

IX.Concentrated Benefits and Diffuse Costs

A.A more general story that builds on voters' rational ignorance goes by
the name of "concentrated benefits, diffuse costs."

B.Simple idea: Special interests are well-informed because they have so
much riding on the political outcome.Regular voters aren't informed because they have so little riding on it.

C.Thus, special interests find it much easier to pressure politicians
than voters.They can say "Vote
against us, and we'll withdraw all of our support.And if you support us, the voters will never
know."

D.Suppose, for example, that voters are selfish, and 90% are
uninformed.Then the 10% of informed
voters could in essence tell politicians: "We'll vote for whichever
candidate promises us the most, not the candidate who will do the best
job overall."

A.Though it gets little Constitutional mention, many people have
identified "the bureaucracy" as the fourth branch of
government.

B.Leading bureaucrats are not elected, but are rather appointed by
elected officials.

C.While most people focus on private "special interests,"
couldn't bureaucrats themselves be seen as a special interest?

D.How might bureaucrats want to pull policy away from the median voter's
choice?One early public choice model
suggested that bureaucrats are budget-maximizers.Since bureau chiefs aren't elected and can't
earn dividends, they engage in "empire building" instead.In other words, bureaucrats are a
"special interest" like any other, and are always trying to get more
funding, staff, etc.

E.Imagine graphing the net social benefits of an agency as a function of
its size.Then while the median voter
might prefer to maximize net social benefits, a bureau chief would prefer to be
to the right of that maximum.

F.What prevents bureaus from expanding infinitely?Presumably, if their conduct gets bad enough,
elected officials can hem them in.But
the pressure for expansion is always there.

G.The difficulty of actually removing bureau heads seems consistent with
this sort of story.But why is it hard
to remove bureau heads in the first place?

XI.Lobbying in Equilibrium: Rent-Seeking and Rent Dissipation

A.Gordon Tullock's deep insight: lobbying (also known as
"rent-seeking") is a competitive industry like any other.If lobbying earns a 10% rate of return, and
the standard rate is 5%, this will induce "new entry" into the
lobbying "business."

B.If the government awards monopoly privileges, for example, then firms
will hire lawyers, political insiders, and so on to try to win the
privilege.

C.Firms will keep entering this "arms race" until the net
profits of the privilege are zero.This happens when the total costs of lobbying equal the total value
of the monopoly privilege!This is
known as "full rent dissipation."

D.The government could award monopoly privileges by taking bids (or
bribes) rather than listening to lobbyists.But then, Tullock pointed out, this intensifies political
competition; if people can get rich in politics, they will pay more to win a
seat.

E.This even works in a dictatorship or monarchy; if the dictator can get
rich by awarding monopoly privileges, this strengthens the incentives of
"upstarts" to try to seize the throne, stage a coup, etc.

F.The big point: Creating opportunities to get rich by rent-seeking might
literally benefit no one because it is so socially wasteful.The rate of return on lobbying is driven down
to the normal competitive level, leaving fewer resources for production.

G.Fun fact: Some international studies have found that economic growth
decreases as the lawyer:engineer ratio rises.

XII.Application: Import-Substitution Industrialization (ISI)

A.After WWII, many less-developed countries turned bitterly against free
trade, arguing that developed countries were preventing them from
industrializing.

C.ISI policies were a disaster on many levels.One of the biggest was the spread of
"corruption," lobbying, etc.In short, rent-seeking.

D.Simple idea: Once the government was handing out political favors in
mass quantities, domestic firms switched much of their energy from production
to politics.It became more important to
have friends in government than to actually produce a low-cost, high-quality
product.

E.Sophisticated theoretical rationales for government involvement, in
contrast, had little real-world influence.These served as "window-dressing," but political
"muscle" was the driving force behind policy.

F.The result: Frequently, the new domestic monopolies were still unable
to cover their costs.The next step was
to subsidize them to keep them afloat.To do so, high taxes and other burdens were imposed on the shrinking set
of productive industries.

G.The key point: The system of political favoritism had its own internal
logic.Once a large fraction of wealth
depended on government approval, there was a massive expansion in the
"industry" of influencing government policy.